The implementation of the Basel IV agreement will entail, among other things, the entry into force of the updates to the Capital Requirements Regulation (CRR III) and the Capital Requirements Directive (CRD VI), introducing significant changes that affect the entire risk framework of banks, in terms of credit, market, and operational risk.
Con particolare riferimento al rischio di mercato si prospetta un impatto rilevante per la Fundamental Review of the Trading Book (FRTB): l’insieme di regole e metodologie di calcolo per determinare gli assorbimenti patrimoniali necessari a fronteggiare i rischi connessi alla gestione del trading book e all’oscillazione nei prezzi delle commodities e dei tassi di cambio – ancorché relativi agli asset classificati all’interno del banking book.
New EBA standards: compliance requirements
This is a comprehensive overhaul whose practical implementation involves the issuance of new technical standards by the EBA (European Banking Authority). These standards – in addition to addressing calculation approaches and methodologies – also expand the reporting obligations for supervised intermediaries, who, starting from early 2025, will be required to produce a detailed set of reports in XBRL format on a quarterly basis. Regardless of the reporting frequency, assessments must be performed on a monthly basis
The required level of granularity extends to the daily detail for P&L elements, thus also raising the issue of reconciliation (an aspect that also draws attention from other regulatory frameworks, including BCBS 239: see the recent paper on risk data aggregation and risk reporting – RDARR). The new reporting requirement places significant emphasis on breakdowns and intermediate calculation results, in contrast to the aggregated data previously required under the earlier framework.
The extension to investment firms
It is worth noting that the growing focus on prudential aspects is not exclusive to the banking sector: in the context of financial intermediaries and investment firms in particular, the new IFD (Investment Firms Directive) / IFR (Investment Firms Regulation) regulations likewise assign the Fundamental Review of the Trading Book a role that is gradually evolving from a disclosure requirement to a regulatory criterion for determining the firm’s capital adequacy level.
Focusing on the reasons that may have driven the regulator to address these issues, one can sense the intent to encourage banks and financial intermediaries to operate with increasing prudence, balancing the profitability derived from market activities with capital adequacy requirements that discourage overly aggressive strategies, thereby contributing to greater stability of the financial system as a whole.
The Irion solution: FRTB calculation model
The calculation models involve the use of statistical algorithms (e.g., matrix products, correlation analysis) applied to large volumes of data, and require moving beyond individual productivity tools – which, in this context, clearly reveal their limitations. Simplified methodologies can be applied under certain conditions, but may prove disadvantageous in terms of the capital requirement to be met by those who choose to adopt them.
At the time of the first version of the FRTB in 2019, Irion developed a Solution that implements a sophisticated calculation model stemming from a project initiative carried out for Mediobanca. A key factor in the success of the initiative was the synergistic integration of SQL with the R language, along with functional model coverage that extends beyond market risk to include counterparty risk elements necessary to complete the analytical framework required by Mediobanca’s risk framework.
